The Myth of Profligate Euro Zone Countries

Spain had a budget surplus before the economic collapse. Spain had a budget surplus before the economic collapse. Spain had a budget surplus before the economic collapse.

Perhaps repeating this line three times will help the type of people who have columns in the Washington Post on the euro zone crisis get some understanding of the issue. Today we get a lecture on southern country profligacy from Daniel M. Price. Yesterday, Post columnist Matt Miller told us how he misleads his daughter about the nature of the euro zone crisis and suggested that the rest of us be equally misleading with our own children.

The reality is that most of the countries currently facing debt troubles were not profligate prior to the crisis. While it may be reasonable to describe Greece as being profligate, the only euro zone country that looks much like Greece is Greece. The other euro zone crisis countries had hugely better finances in the years leading up to the crisis.

Italy, the closest Greece competitor among euro zone crisis countries, had relatively small budget deficits in the years before the crisis. Its debt to GDP ratio fell from 93.7 percent of GDP in 2001 to 87.3 percent of GDP in 2007. In other words, the deficits of these years were completely sustainable.

Spain ran budget surpluses in the years from 2005-2007. Its debt to GDP ratio fell from 50.3 percent in 2000 to 26.5 percent of GDP in 2007. There is no remotely plausibly story of government profligacy here.

In short, people who describe the euro zone crisis as a story of excessive government deficits are pushing an ideological agenda that has nothing to do with reality. The story of the current deficits of the non-Greece countries is the story of the collapse of housing bubbles that threw the euro zone economies into a severe downturn. The European Central Bank (ECB) has magnified the problem by maintaining relatively tight monetary policy in order to maintain very low inflation and also explicitly asserting that it would not act as a lender of last resort to the heavily indebted countries.

Blaming government profligacy may be useful to those who want to see cuts in social spending, but it is not a story that is based in reality. It conceals the incompetence/greed of the private sector bankers who fueled the bubble. It also ignores the recklessness of the ECB of clinging to its inflation obsession even in the midst of a crisis that threatens the survival of the euro and could cause millions of additional workers to lose their job.